Chapter 05 - Recommended Problems - Solutions - Part 2.pdf - CHAPTER 05 RECOMMENDED PROBLEMS SOLUTIONS 7 The introduction of a quota limit\u2014limiting

Chapter 05 - Recommended Problems - Solutions - Part 2.pdf...

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CHAPTER 05 RECOMMENDED PROBLEMSSOLUTIONSMGEA01 MICHAEL HOFALL 2014 7. The introductionof a quota limitlimiting the workweek to hours, below the current equilibrium quantityimplies that there is quota rent earned by the suppliers of labour. So it should not come as a surprise that workers who expected to keep their jobs under the new policy were in favour of the policy. The demand price (the price paid by the demanders of labour, that is, firms), compared to what the wage had been before the introduction of the policy, had risen. Furthermore, since it is costly to train new workers, firms could not use new hires to completely make up for the shortfall in the hours that their current employees were working. As a result, firms had to produce less output and earn lower revenue than before the policy. Like every quota that is below the equilibrium quantity, this quota introduced inefficiency: even if workers wanted to work longer hours and firms agreed to this arrangement, such trades were no longer legally possible. You should expect some black market activity to occur: workers
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